By Matthew Rose, Enerdynamics Instructor

It’s been a busy few months in the nation’s capital with a number of notable decisions and policy changes that target the country’s electricity industry.

Among the decisions causing great debate is the ruling from the United States Court of Appeals rescinding the Federal Energy Regulatory Commission’s (FERC) rules for demand response programs in organized wholesale markets. The concept of rewarding customers for strategically reducing consumption at various time periods for system reliability and economic benefits remains a work in progress, and it is coming under fire.

The general concept of demand response (DR) empowers customers to consciously reduce or change their consumption habits for reliability and economic benefits. By reducing demand, the grid’s need to secure new generation to meet load requirements is lessened and may provide a more cost-effective way of keeping the system in balance. There isn’t much debate around the general concept – but how demand response resources should be valued, priced, and regulated is controversial.

In this week’s article we discuss the FERC order that was rescinded; next week we will discuss implications of the Court’s decision.

FERC’s Role in Demand Response

FERC has actively promoted DR markets and rules for organized wholesale transmission organizations. Its efforts were initially evident in FERC Order 719, Wholesale Competition in Regions with Organized Electric Markets. The rule, passed in 2008, ordered operators in organized wholesale transmission markets to treat demand response bids from customers or aggregators on a comparable basis with conventional generator bids. It signaled the evolution of demand response as more than just a system reliability tool and began to position the resource as a broader economic option.

In an effort to provide greater detail, FERC issued Order 745 in March 2011. The Order came about after extensive debate and contention from various demand response stakeholders. A key outcome from the FERC order was the determination of how transmission organizations should value DR. The FERC ruled that DR had the same market value as a power plant and deserves to be commensurately compensated. According to FERC, DR resources should be paid the determined locational market price (LMP).

The FERC Order ended up in the U.S. Circuit Court as brought forward by the Electric Power Supply Association (EPSA) as petitioner. EPSA’s involvement reflects the view of many of the conventional generators who were finding it increasingly difficult to compete with demand response.

The U.S. Court of Appeals Decision

On May 23, the U.S. Court of Appeals for the D.C. circuit entirely vacated FERC’s Order 745. In a 2-1 decision, the Court disagreed with FERC’s justification for compensating demand response resources. In its decision, the Court noted that “FERC’s new rule goes too far, encroaching on the state’s exclusive jurisdiction to regulate the retail market.” The Court went on to say that FERC, by ordering compensation from demand response from retail customers, was overstepping its authority by regulating retail markets, (which is a power denied to FERC and reserved for the states).

The Court also argued that demand response is not actually a source of generation; it does not involve a direct sale to the wholesale market from consumers. Consumers participating in demand response were given preferential treatment by FERC, being paid full-market price (LMP) as well as saving the generation component of its retail rate. The Court indicated that this results in overpaying for the resource.

The EPSA position claims that the preferential treatment came at the expense of conventional generators who want to invest in new generation resources but lack the financial rationale or incentive (given the preference for DR resources). EPSA claimed policymakers were sending a signal to investors that you don’t need to build new generation – the load can be balanced using demand response resources.

It is important to note that the Court’s rescinding of FERC Order 745 does not disallow demand response resources from bidding in the market, but successful bidders will not receive the same compensation as resources bid by conventional generators.